Not just a pretty Face(Book)

Tue 28th Aug 2012

Everybody seems to have a reason or excuse to use Facebook (FB), usually just variations of wanting “to stay in touch”. The world has no doubt become a smaller place with the advent of FB. The social media website currently has 845 million users. If it were a country, it would have the third biggest population in the world, behind China and India. If China were to unblock FB in their country, milllions more would add themselves to the FB collective. During its eight year lifetime, it has created its fair share of clichés, for example every other status update seems to end with “… is tired”, “… is at college/work” or “… is wasting time on Facebook”. If an alien were to come to earth and judge us all by our FB accounts, they might think we are all really cool people, having fun every second of the day, and having a habit of taking pictures of our reflection with our mobile with the flash on.

If you were to start a business right now, where would you see yourself in eight years time? Statistics show that more than half of all businesses fail within the first three years. How many of those that do succeed go on to be worth more than $75 billion? Only one has ever done so in recorded history. FB, as a business, is now so big that it is worth more than Boeing, the world’s largest aircraft manufacturer.

So how does FB function as an online business? The average business model requires a firm’s performance to be totally dependent on the demand for its product or service. Take an apple shop, for example. If there is no demand for apples, there is no revenue, no profits, and eventually no business. While we need to eat food that food does not have to be apples and that is why such a business would run the risk of failing. However, the business model for social networks (such as FB, MySpace, Orkut etc.) carries much less risk, in that it takes advantage of our most basic need to socialise, much like how a barber shop takes advantage of our basic need to cut our hair. But unlike the hairstyling market, where there are thousands if not millions of different shops to choose from, FB monopolises on the social network market worldwide.

FB earns most of its revenue off of advertising and marketing, the rest of it comes from Zynga Games (the developers for FB games like Farmville and Mafia Wars). The source of FB’s marketing supremacy comes from the amount of consumer data they hold, data which FB users are all too willing to give away. The average FB user reveals not just their name, age and email, but also family, relatives, recent college or workplace, hobbies, favourite movies, books or music. Fortunately, they’re not likely to stalk your relatives, or give you a surprise visit at your workplace. But information is power and for the marketing industry this is true in every sense of the meaning. FB also monitors the groups you join and the things you 'Like', using all this information to effectively target you with adds that you can relate to. Yes, there are privacy options, most of them forced on by online privacy activists. But what many people don’t realise is that, while your personal information is protected from other FBers and Third-party organizations, the FB marketing team itself has total access to your information, as long as they don’t 'abuse' it. After all, it IS their website, and you DID willingly provide the information. In fact, they don’t need to give your information to anyone in order to become the advertising powerhouse that they are.

For a long time, companies have always struggled to keep your attention while keeping up with the trends, and would pay a lot of money to do it efficiently. One option available to the average multinational company, say Toyota, would be to use a large advertising banner in the city centre. However, they might not reach the right audience, wasting their investment. FB on the other hand, knows all about you, and can pinpoint ads to the relevant audience. This makes FB a highly attractive place for companies to invest in advertising, and we can see this in FB’s high revenue figures. On February the 1st, FB submitted its IPO (Initial Public Offering) proposal to the SEC (Securities and Exchanges Commission) in the US. An IPO is the first sale of a firm’s stocks on the stock market, also known as “going public”. An IPO helps a company to raise a considerable amount of money, as it sells shares of its company to investors for a set price. The IPO would raise $5 billion for FB (the highest valued IPO of an internet-based company), and would turn the top 1000 employees into instant millionaires. Sheryl Sandberg, chief operating officer for FB, stands to gain more than $2 billion. It is unclear how much exactly Mark Zuckerberg will earn from the IPO, except that it’s definitely a 10-digit number, and he’s planned an archaeological excavation adventure trip in Borneo for himself and other employees to celebrate. Mark Zuckerberg has a difficult job ahead of him now, convincing potential investors that he can make good profits.

Many investors are still sceptical about FB’s ability to handle a public business. Chances are that FB will be looking towards more opportunities to make profit out of its platform, like charging smaller websites to help them in the advertising department. Also, watch out for ads coming to FB on mobile. The IPO has now launched the social network onto the global arena, standing alongside giants such as Google. The competition between Google and FB is already getting serious, as Google introduces its own social utility; Google+. Similarly, FB is planning to start its own search-engine-like capabilities which would allow the user to read news, listen to music or watch movies directly from FB. Google may have its sights set on the world, but sooner or later they’ll have to see FB for what it is, an up-and-coming threat to its dominance.